Muddled indemnity

Putting a spoke into the adjudication process is a sort of parlour game. It doesn’t work that often but lawyers thrive on it. The spoke is intended to stymie the binding nature and avoid enforcement. It is hugely technical stuff; as it was in this Northern Ireland case, where the adjudicator ordered the main contractor Vaughan Engineering Services to stump up £351,000 or so to subcontractor Sutton Services International.

Let me tell you what happened. The work done by Sutton is the water treatment installation at the Royal Victoria Hospital, Belfast. It is a construction contract within the Construction Act 1996 rules, and that means there is a right to call up an adjudicator when a dispute pipes up. It did. The adjudicator did his stuff. Vaughan lost.

That’s all very well, said Vaughan, but we suspect that Sutton will not be able to pay back the £351,000 when we undoubtedly win in the next round. Ah, said Sutton, we have an insurance policy, which will pay out if you win in litigation. But Vaughan hummed and hawed at the idea of banking on the insurance world. Gosh! Do people get a queasy feeling about insurers? Do insurers not have a reputation to die for? Upstanding? Straight? No footwork?

Now then, the Northern Ireland High Court, as with all of the courts in the UK, has an overriding discretionary power to avoid enforcement of an adjudicator’s decision if there is cause for concern about the financial position of the winning party in the adjudication. Mind you, the court will have to be watchful that any argument is not a device to frustrate the purpose of the adjudication system: the game is up if the winner is in financial straights because the other bloke is holding on to cash owed; neither can you whinge about a penniless outfit now, if they were boracic when you entered into the deal.

Gosh! Do people get a queasy feeling about insurers? Do insurers not have a reputation to die for? Upstanding? Straight? No footwork?

All those tests are well known. But in this particular case, Sutton ran a useful angle to get enforcement. It said it held professional indemnity insurance with a value of £5m for each claim. So even if its financial position is dickey, there is no need to worry, and can we therefore have our £351,000 please?

The main contractor’s lawyers exercised some caution over all this insurance stuff. They told the Northern Ireland judge that if Sutton’s insurer simply gave it an indemnity under the policy in respect of claims against Sutton arising out of the Belfast Royal Infirmary circumstances notified, and which Vaughan advanced against the insured, all would be well.

And it so happened that the fair-minded insurer said yes to all that but - and it’s a big but - added: “That indemnity is of course subject to the terms and conditions of the policy at all times.”

Vaughan wanted, unsurprisingly, an unequivocal indemnity so that it could happily trust the insurer if and when it was entitled to repayment

The lawyers blinked at this. It is not all that plain that Sutton’s professional indemnity policy covers it for going wrong when the complaint at the hospital is about failure to monitor the water quality in the pipework system and consequent corrosion. So, come on Mr Insurer, is all that covered by the policy? Do you see the ifs, and more ifs, that might cause the judge not to be impressed with this insurance policy idea?

So Mister Justice Weatherup made an order that of the £350,000, £150,000 was to be paid now. Then Vaughan had to immediately commence its court proceedings on the substantive dispute and pay the other £200,000 into court, while Sutton got a complete indemnity from its insurers. And they all went home.

Last week they all came back again to hear what the insurer now had to say. After all, they had in front of them the statement of claim in the litigation. Vaughan wanted, unsurprisingly, an unequivocal indemnity so that it could happily trust the insurer if and when it was entitled to repayment. The insurer said, “We are not aware of any circumstances which would entitle the insurer to refuse cover.”

Oh come on, not good enough. It has to be a blanket indemnity. Nothing else will do. And the judge said the cover remained unclear, so the £250,000 paid into court remained locked in there. Great idea though … all we need is a plain and simple indemnity clause by the insurance folk. It’s easier getting blood out of a stone.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple